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Reverse mortgage loan: what is it all about?

Any individual, above 60 years of age or any married couple with either husband or wife above 60 years of age, who are citizens of India, will be eligible senior citizens.

Reverse mortgage loans are to be extended by primary lending institutions. These are scheduled banks, besides housing finance companies registered with the National Housing Bank and other institutions, which may be notified by the Government.

The senior citizen eligible for the loan should offer mortgage of a residential house or flat, which should be both self-acquired and self-occupied, located in India with clear title indicating the borrower’s full ownership without any encumbrance thereon. The operational guidelines on reverse mortgage loans, available from the website on FAQs on the subject would require that the borrower should be the owner of the self-acquired property, though this requirement should not be necessary as a person may get absolute title over a property received either by way of inheritance or by a Will or by way of gift or settlement or even on partition. The Reverse Mortgage Scheme, 2008, notified by the Central Government in S.O.No.2310(E) dated September 30, 2008 requires only ownership of property without encumbrance. The operational guidelines would require to be brought in line with the scheme, which should have an overriding effect.

Operational guidelines would further require that the residual (future) life of the property should at least be 20 years. The further requirement that it should not only be self-occupied by the senior citizen but also be a permanent primary residence, where the senior citizen would spend majority of his time and should be the address for general correspondence, bills, bank statements, tax return, and the like. In short, it means that it should be a bona fide residence under occupation of the borrower.

The size of the loan would depend on the market value of the property, the age of the borrower and the prevailing interest rate and is left to the discretion of the lending institutions. All that the operational guidelines would insist is that the basis on which the amount is arrived at should be disclosed to the borrower. Operational guidelines expect the lending institutions to revalue the property periodically and at any rate, at least once in five years, apparently with a view to adjusting future payments to cover the risk of fall in value. Valuation of the property can be done by professional valuers of the lending institutions. The guidelines would rule out reckoning of expected future increase in property value. The notification issued by the Central Government in Reverse Mortgage Scheme, 2008, has nothing to say on either the amount of loan or the rate of interest.

The interest rate may be fixed by the lending institution “in the usual manner” based on its risk perception, the loan pricing policy and the like. The rate may be either fixed or floating, but indicated clearly along with periodic rests to the borrower.

Reverse Mortgage Scheme, 2008, provides for either a lumpsum payment not exceeding 50 per cent of the loan amount with a ceiling of Rs. 15 lakh (or any amount notified by the Government) with the balance to be paid periodically or the entire amount to be disbursed periodically as may be decided mutually between the lending institution and the borrower. Periodic payment should not exceed Rs. 50,000 a month or such other amount as may be notified by the Government. Operational guidelines also provide for the line of credit to be utilised in time of need as for improvement and insurance of mortgaged property, medical emergencies and other genuine needs, besides repayment of existing loan at the time of mortgage.

(To be concluded)

S. RAJARATNAM

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